One of the first steps on your path to Financial Independence is working out how much you will need to save to make that a reality. This is primarily driven by your assumed expenditure rate. Reducing this will reduce the total you need to save and bring FI closer.
Then we can look at when we expect to accumulate the required financial nugget, by doing some projections (i.e. bugger about in Excel for a bit). This allows us estimate the number of years until we can escape the Horde and join the others who have already made the journey to the Mall of Financial Independence (it seems the gods of FI are not without a sense of irony). Attaching a date to a goal this behemoth makes it seem more attainable.
For me, have split the projections into 3 categories and have an assumed annual rate of growth for each. Pensions & equities (together assume they follow the same equity growth), cash and property. Including inflation and wage growth, this gives us 5 input assumptions we can play around with.
The other assumptions will be the monthly additions to pensions, equity outside the pension, property (i.e. the capital repayment on the mortgage) and cash. I have assumed that I will carry on saving at the same current rate to make things simple (hopefully in reality we would get payrises above inflation and be able to save more as we aren’t sukkas who succumb to lifestyle inflation).
Some other very interesting points
- This is for just me. Mrs Z will be beavering away and saving as well.
- The pension contributions are buoyed by company contributions and tax relief.
- I have assumed that savings will carry on as they currently are, but in reality I would not carry on allocating to cash too much more.
- Hopefully the assumptions are reasonably prudent, e.g. salary growing in line with inflation.
- We have a pretty good mortgage rate and so don’t overpay as we get more of a return on investments than we pay in interest. If this changed (i.e. base rates go up) then savings would reduce and overpayments would start.
- It’s been kept simple. There’s nothing in there for a potential house move, share option maturity, kids etc. But, shut up, it’s a start.
Here are my projections, or the “The Oracle of Truth”;
The second target is the real focus for now, and 14 years seems a long way off.
Looking at the numbers above it’s a worrying having so much money tied into a company pension scheme that you have limited control over. But the company contributions and tax relief are too enticing for the moment.
It would be nice to reduce that second target within 10 years. Doing a quick goal seek and to achieve this without increasing my savings would need an annual return of 15%. So just a stellar year, every year for the next 10. Easy. Or I would need to find another £490 a month and fling that at the market.
I prefer to err on the side of prudence with projections, so hopefully targets would be reached easier than this.
Projecting your investments like this is a good way to set targets, but should be eyed with a degree of suspicion that’s normally reserved for a man rooting through your bins. Just by creating a projection of your investments you don’t normally suddenly gain control of Mr Market, he is far too powerful for that. The projections do provide away for us to monitor our progress towards goals but are by no means a crystal ball and so should be reviewed and updated.
I don’t think this needs to be too often, maybe twice a year to see how things are progressing (or after a significant event, moving house or a big market crash).
I could include Mrs Z in here as well, but I wanted to keep this personal. Just me and Mr Market.
Spend less, save more, escape the Horde.